August 1, 2018

On June 14, 2018, the United States Court of Appeals for the Fifth Circuit issued a revised opinion that held that Federal law does not prevent a bona fide shareholder from exercising its right to vote against a bankruptcy petition just because it is also an unsecured creditor. In re Franchise Servs. of N. Am., Inc., 891 F.3d 198, 203 (5th Cir. 2018), as revised (June 14, 2018).

Franchise Services of North America, Inc. (“FSNA”) was once one of the largest rental car companies in North America. Id. at 203. In 2012, FSNA desired to purchase Advantage Rent-A-Car and enlisted an investment bank, Macquarie Capital (U.S.A.), Inc. (“Macquarie”), to assist. Macquarie created a fully-owned subsidiary, Boketo, LLC (“Boketo”), to make a $15 million investment in FSNA.

In exchange for the capital infusion, FSNA gave Boketo 100% of its preferred stock in the form of a convertible preferred equity instrument.

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July 25, 2018

Bankruptcy courts have authority to hold in civil contempt one who refuses to comply with a bankruptcy court order, including incarceration and/or daily fines until the offender complies.[1] But when does civil contempt[2] cross into criminal contempt, which is punitive and outside the scope of the bankruptcy court’s powers?[3] While a bright-line rule is wanting, the 9th Circuit’s silence on a recent case implied that three years of incarceration plus a $1,000 daily fine to coerce compliance does not implicate criminal due process concerns and, therefore, is within the bounds of permissible bankruptcy court authority.

Kenny G Enterprises, LLC’s Chapter 11 case (which dealt with a developer named Kenny G, and not the world’s favorite saxophonist) was converted to Chapter 7, triggering a requirement

July 22, 2018

The Patient Protection and Affordable Care Act of 2010 (a/k/a “Obamacare” or the “ACA”), with its infamous “individual mandate”[1] (and corresponding “shared responsibility payment” (which we’ll call the “SRP”)),[2] is no stranger to controversy. Everyone is well aware of the legal challenges mounted against the individual mandate, and the seminal SCOTUS opinion upholding the mandate as a valid exercise of Congress’s taxing power – National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012). Don’t worry, we’re well aware that you, along with nearly every other American (including us here at the Bankruptcy Cave), are sick and tired of hearing about ACA squabbles. But this post will explore one side of the ACA that you’ve almost certainly not considered, but which is interesting (to us at least). It’s interesting because it provides the leading thought on which government exactions should and shouldn’t be

May 1, 2018

Garrison Keillor once said, “Sometimes I look reality straight in the eye and deny it.”[1] Being that the case arose in Minnesota, perhaps Circuit Judge Michael Melloy channeled Keillor, one of that state’s great humorists, when he authored the opinion in The Official Committee of Unsecured Creditors v. The Archdiocese of Saint Paul and Minneapolis et al. (In re: The Archdiocese of Saint Paul and Minneapolis) Case No. 17-1079 2018 WL 1954482 (8th Cir. April 26, 2018) [a link to the opinion is here].[2] Regardless, the quote must sum up the Appellant’s view of the outcome. The unsecured creditors that make up the Committee, most of whom were victims of clergy sexual abuse, will not obtain access to the value of over 200 non-profit entities affiliated with the Archdiocese of Saint Paul and Minneapolis to pay their claims.

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April 9, 2018

In In re Palmaz Scientific Inc., the bankruptcy court for the Western District of Texas determined that a confirmed plan of reorganization would not stop a group of investors from pursuing direct (non-derivative) claims against directors and officers of the debtor companies because plan injunction language only covered claims against the debtors. 2018 WL 1036780, at *5 (Bankr. W.D. Tex. Feb. 21, 2018) (slip op. at 11). Unfortunately for the investor plaintiffs, this proved to be a success without victory because the court went on to hold that the plan precluded the investors from using the D&O insurance proceeds to satisfy their claims. Id. at *7 (slip op. at 14). This case is both a cautionary tale for claimants and a potential boon for post-confirmation trustees.

When (and why) do D&O Insurance Proceeds become the coveted prize?

When D&O claims are asserted against a distressed company and/or its directors

February 1, 2018

Happy 2018! We at The Bankruptcy Cave have been itching to write about the Cherry Growers Chapter 11 case – which really is ground-breaking – but the holidays, life, and yes, work for clients too, all just got in the way. But with each passing week, the case stayed on our minds. So now that time permits, here is the writeup – and see below for the remarkable significance of the case.

In re Cherry Growers (now reported at 576 B.R. 569, Bankr. W.D. Mich. 2017), is a garden-variety produce-related bankruptcy case. (Ha ha, “garden-variety” produce, get it?) The Debtor bought produce and sold it to others, in addition to conducting other food distribution activities. When the Debtor filed for bankruptcy, there was the typical push-and-pull between a lender secured by the Debtor’s inventory and a/r, and a supplier claiming a trust interest in those same assets, protected by the

October 24, 2017

Courts and professionals have wrestled for years with the appropriate approach to use in setting the interest rate when a debtor imposes a chapter 11 plan on a secured creditor and pays the creditor the value of its collateral through deferred payments under section 1129(b)(2)(A)(i)(II) of the Bankruptcy Code. Secured lenders gained a major victory on October 20, 2017, when the Second Circuit Court of Appeals concluded that a market rate of interest is preferred to a so-called “formula approach” in chapter 11, when an efficient market exists. In re MPM Silicones (Momentive), LLC, 2017 WL 4700314 (2d Cir. Oct. 20, 2017).

In Momentive, the bankruptcy court categorically dismissed expert testimony presented by the lenders to demonstrate a market rate of 5-6+%. Because the debtor had offered to cash out the lenders (and prepared to borrow the funds necessary to do it), there was direct evidence of the

But trust us, faithful reader, and you can, in about three short minutes, become a whiz on last week’s latest change to ObamaCare, which we think will lead to a lot more healthcare-related restructuring activity. So here is the 411 on last week’s termination of ObamaCare’s so-called “CSR Subsidies,” and its impact on our precarious, bankruptcy-prone, healthcare marketplace. All presented to you in easy-to-follow FAQs!

But trust us, faithful reader, and you can, in about three short minutes, become a whiz on last week’s latest change to ObamaCare, which we think will lead to a lot more healthcare-related restructuring activity. So here is the 411 on last week’s termination of ObamaCare’s so-called “CSR Subsidies,” and its impact on our precarious, bankruptcy-prone, healthcare marketplace. All presented to you in easy-to-follow FAQs!

What is a CSR Subsidy?

The federal government calls them “Cost-Sharing Reduction Subsidies.” In short, a key part of ObamaCare had the federal government give cash to insurers. In turn, insurers used that money – the CSR Subsidy – to lower all ObamaCare premiums, and also reduce out-of-pockets and deductibles for low-income ObamaCare enrollees.

How much were these CSR Subsidies?

The CSR Subsidies cost the federal government about $7-$9 billion annually.

How much did the CSR Subsidies help?

A lot. The Kaiser Foundation – which has great coverage of this and other healthcare issues – estimates that the CSR Subsidies to insurance companies prevented certain rate hikes that would be borne by all ObamaCare enrollees. Also, each low-income ObamaCare enrollee’s annual medical and prescription deductibles decreased by over $3,000 and annual out-of-pocket maximums were lowered by over $5,500. We’re not making this up, click here to see the Kaiser Foundation study for yourself.

But I thought Congress didn’t “Repeal or Replace” ObamaCare – So how did this change happen?

The CSR Subsidies were required under ObamaCare – but Congress never actually appropriated any money to make the CSR Subsidies to insurance companies. The prior administration paid the insurers anyway, leading to a very weird lawsuit by Congress against President Obama. Last week, President Trump simply decided to no longer send funding to insurance companies, and since the funding had never been appropriated by Congress, no congressional action was needed to end the federal government’s CSR Subsidies.

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